SEC approves investor say on CEO pay

Rule, opposed by GOP, delays to 2013 pay votes on small firms

By

RonaldD. Orol

WASHINGTON (MarketWatch) — The Securities and Exchange Commission on Tuesday in a partisan, split vote adopted controversial rules that give institutional investors a vote on the pay packages of top executives at U.S. corporations.

The commission approved the measure, which was introduced on Oct. 18, by a vote of 3 to 2. A say on pay vote is required at least once every three years, starting this year.

While the vote is nonbinding and corporations are not required to follow the wishes of shareholders, the provision is expected to have a transformative impact on the relationship between chief executives and institutional investors — in part because of the embarrassment a company could experience if investors turn out strongly against its executive compensation. The measure is expected to give investors more power in behind-the-scenes discussions with corporate executives on a wide-variety of issues, including executive pay.

The agency is implementing a provision of the Dodd-Frank Act that requires the agency to approve the rules.

Republican commissioners opposed the measure, arguing that the SEC should have permanently exempted smaller publicly traded corporations from the say-on-pay provisions. The rule, however, does provide a temporary exemption for smaller corporations until annual meetings after Jan. 21, 2013. The agency said that the delay will allow the SEC to decide whether adjustments to the rule would be appropriate for smaller companies.

GOP Commissioner Kathleen Casey questioned whether the Dodd-Frank Act mandates a say on pay vote on all public companies. She indicated that the focus of the measure in the statute is to identify problems associated with large public companies, not smaller institutions.

“While I appreciate the release delays for two years, I do not believe it is appropriate to subject them to say on pay requirements at all,” said Commissioner Kathleen Casey, GOP commissioner.

Troy Paredes, a Republican commissioner, opposed the measure.

“I disagree with the final rules treatment of smaller public companies,” he said. “The commission did not do enough for smaller public companies.

He insisted that the agency could have decided to exempt newly public companies from the reporting requirement until after the company’s first public annual meeting.

“The commission needs to do more to ensure that the regulatory regime does not dissuade companies from going public,” he said. “We need to encourage job growth.”

However, Democratic commissioner Elisse Walter said the measure does not impose a problematic burden on small businesses.

“We will have time to gain experience with the rule to see if further adjustments are necessary for small businesses,” said Walter.

Under the rule, companies will be required to allow shareholders to vote once every six years on how often they would like to cast a “say-on-pay” vote with three options: annually, once every two years or once every three years.

In addition, the provision provides institutional investors with a nonbinding vote on “golden-parachute” payments that are compensation arrangements for top executives associated with merger transactions, acquisitions and going-private deals.

Companies will also be required to provide disclosure in annual reports about how the firm has responded to the results. For example, companies ignoring the will of shareholders represented through the non-binding vote would need to explain in these disclosure documents why they made that decisions.

The proposed rules would also require that institutional investors report their votes on executive compensation and “golden-parachute” arrangements at least annually to the SEC. The agency had already adopted such rules for corporations that have capital injections from the $700 billion Troubled Asset Relief Program.

The provision is one of roughly 100 rules the agency must approve based on the Dodd-Frank Act.

Shareholders will be allowed to cast this nonbinding “frequency” vote at least once every six years beginning with the first annual shareholders’ meeting in 2011, according to the measure.

Sanjay Shirodkar, Of Counsel at DLA Piper and a former special counsel with the SEC, said he expects companies will increase the amount of behind-the-scene discussions they have with top executives. He argued that there was a risk that compensation committees at corporations move further in the direction of approving homogenized pay packages as a means of appeasing disgruntled shareholders. He added that companies will likely vary when it comes to how much opposition they will accept.

“Some people might take the view that even a 5% negative vote on the pay package is unacceptable,” Shirodkar said.

For the nation’s top chief executives, much is at stake. In 2009, the median total compensation for S&P 500 chief executives was roughly $7.5 million, down from approximately $8.2 million in 2008, according to Equilar Inc., a Redwood City, Calif.-based executive-compensation research firm.

Many regulatory observers believe the U.S. system will soon resemble, in part, the system that already exists in Britain, where investors have long had the right to an annual vote on executive compensation. That said, companies there rarely experience a negative vote from institutional investors because pay packages already have been negotiated well in advance between shareholders and companies in private.

SEC seeks more data from hedge funds

The SEC also introduced a proposal that would require large hedge fund and buyout shop managers with more than $1 billion in assets to report information for use by a newly formed Financial Stability Oversight Council to monitor systemic risk. The Commodity Futures Trading Commission will consider proposing a similar proposal on Wednesday.

Large hedge funds would need to report information about asset classes, geographical concentration, leverage, and liquidity. Big private equity companies would need to respond to questions on the leverage incurred by each fund’s portfolio companies.

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